Riku Ruokolahti: How the reputation value chain works
“A company’s most valuable asset isn’t sitting in a bank vault like a pile of cash.”
We have reached the point where we are taking stock of our progress. Before we move on—to the specifics of reputation management—it’s time to summarize what we’ve covered so far.
In the first two chapters, we examined the significance of reputation as intangible capital and explored how it technically generates value. At the same time, we considered the role of reputation in relation to the rest of the business strategy. In the third chapter, we focused on the roles and functions of reputation and brand in a company’s value creation.
From theoretical considerations, we shifted our focus to the executive leadership teams and observed the practical aspects of leadership from the sidelines. The inevitable practical demands of leadership compelled us to turn to modeling leadership.
Before reaching this beautiful moment—the climax of the first part of the book—we still had to explore the origins, significance, and timing of its fame. That was the focus of the previous chapter.
The mechanism that generates reputation value
But let's get to the point. This diagram, which illustrates the reputation value chain, summarizes nearly everything that has been written so far.
Simply put, from left to right: a company’s interactions with its stakeholders shape perceptions that, taken together, form the company’s reputation. The support stakeholders give the organization—through purchasing, word-of-mouth recommendations, job applications, and financing—is a result of that reputation. The company’s business results, in turn, depend on the actions of stakeholders; or to put it bluntly, the actions of stakeholders are the business. This is how the reputation value chain works.
This is the mechanism by which reputation generates value so effectively that it is often a company’s most valuable intangible asset.
But this sword cuts both ways. The central role of reputation in value creation stems from the fact that reputation is also, demonstrably, the most nerve-wracking issue when it comes to risk management. This is easy to understand, since reputation—a company’s most valuable asset—does not sit in the company’s bank vault like cash. It resides in the minds of others, of strangers. Because company management has no direct control over the thoughts and interpretations of others, reputation is a frightening thing. Reputational risk hangs over the CEO like the uncontrollable Sword of Damocles. Or at least that is how it feels when reputation has not been identified, measured, and consistently understood.
I will now return to the book’s opening chapter. Since reputation is still such an abstract concept for many management teams that they cannot systematically address it on their own, the word “reputation” tends to land on the desk of the person whose job is closest to interpreting other people’s thoughts. Often, their first name is “Head of Communications” and their last name is “Person.” As a result, the communications manager is responsible for the company’s competitiveness and key risks.
To prevent things from getting this out of hand, we’ll move on to the next section of this book, which deals with the systematic management of reputation. Thank you for sticking with us this far.
Riku Ruokolahti has written a handbook on corporate reputation and reputation management. The excerpt published here, titled “How the Reputation Value Chain Works,” is taken from the first section of the handbook: “The Holy Trinity of Reputation, Business, and Management.”
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